U.S. Economy Slowly Gaining Traction – What’s Ahead for Year-End?

Weekly Market Report
Observations on the Capital Markets – Week Ended November 29, 2013:

  • U.S. economy slowly gaining traction – what’s ahead for year-end?
  • Last week in the capital markets: another quiet week
  • U.S. business activity indicators appear generally solid
  • Other economic data was mixed…not bad
  • World watch: Europe, Japan and China

U.S. Economy Slowly Gaining Traction – What’s Ahead for Year-End?
As we enter the final month of 2013, my themes of the last several weeks continue – the capital markets, in general, remain quiet and U.S. economic data, while mixed, shows signs of steady improvement. This week, I’ll start by looking forward to some news we’ll be watching as the year closes out . . .

Washington will soon be back to page one:

  • Taper watch – Next meetings of the Fed are December 17-18 and then January 28-29. Ben Bernanke’s term ends on January 31.
  • Congress watch – December 13 is the non-binding target date for a budget agreement. January 15 is the hard date – once again, a government shutdown looms, if no deal is reached. February 7 is the debt ceiling deadline.

Lots of U.S. economic data is due for release:

  • Economy – Q3 GDP (second estimate), Markit PMI, ISM manufacturing and non-manufacturing PMIs, construction spending and factory orders
  • Housing – new home sales
  • Employment – monthly jobs report (Friday 12/6), unemployment claims

Last Week in the Capital Markets: Another Quiet Week

  • Currencies: The Yen was weak again, as were Emerging Market currencies.
  • Bonds: The 10-year U.S. Treasury yield was unchanged at 2.75% and the 10-year TIP yield rose 4 basis points (bps) to 0.60%. Overseas, sovereign bond markets were generally quiet, despite rating changes for a number of Eurozone sovereign issuers (more on that below).
  • Equities: For the second week in a row, the MSCI Japan was up about 1% in U.S. dollar terms (it’s up roughly 6% over the past month). Year-to-date, the MSCI Japan is up roughly 50%; the S&P 500 Index was up roughly 30%; the MSCI Europe was up roughly 20%, and the MSCI Emerging Markets Index was up only about 5%.
  • Commodities: WTI oil ended the week down about 2%; Gold ended up about 0.5%.

U.S. Business Activity Indicators Appear Generally Solid

  • The Richmond Fed district manufacturing survey jumped from +1 to +13 on strong new orders and a longer workweek. The Dallas Fed district manufacturing survey was also in positive territory.
  • The Chicago Fed’s National (not regional) Activity Index slipped to just below break-even in October. The area’s November composite PMI remained strong, boosted by new orders and employment.

Other Economic Data Was Mixed . . . Not Bad

  • The LEI (index of leading economic indicators) rose 0.2%. Initial jobless claims fell 10k to 316k – as always, the weekly data can be noisy, but this is a good number.
  • University of Michigan’s Index on consumer sentiment rose to 75.1 but the Conference Board consumer confidence softened to 70.4.
  • Housing showed continuing, if diminishing strength, as the Case-Shiller home price index (20 major metropolitan areas) rose 1% month over month (m/m) in September and 13.3% year over year (y/y), a cycle high. Prices in all 20 cities rose.
  • Housing permits rose above the 1 million/year pace in October. Purchase mortgage applications were essentially flat, still near the year’s lows. Pending home sales ticked down for a 5th month in row in October, reflecting both the normal “hangover” after the “rush to buy” when rates first started to rise in May and, according to realtors, buyer pushback against higher house prices.

World Watch: Europe and Asia

  • Germany might have a government – Angela Merkel’s Christian Democrat party and the Social Democrats (SPD) appear to have settled on a platform they can build a coalition around . . . if the membership of the SPD approves it in an upcoming referendum.
  • Italy still has one – Silvio Berlusconi was formally expelled from Italy’s Senate. A split within his party (his former # 2 spun off a new party) ensured that the Letta-led government will remain in power for now.
  • Greek sovereign debt was upgraded by Moody’s, from C to Caa3 (it’s progress!). S&P upgraded the debt of Spain and Cyprus while downgrading the Netherlands from AAA to AA+.
  • The Ukraine saw massive protests against a government decision to align with Russia rather than Europe.
  • In Japan – The Manufacturing PMI rose to 55.1, a new cycle high. Small business sentiment is near 20-year highs and Headline CPI was 1.1% y/y in October. The 10-year JGB (government bond) yields roughly 0.6%.
  • China staked out a whole lot of ocean as “my turf.” The U.S. and other nations immediately violated the zone to signal “no, it isn’t.” The consensus is that this will escalate tensions but not amount to much (unless there’s a mistake).
  • Thailand saw large protests . . . a thread to government hold on power?

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Data Sources: The Wall Street Journal, Financial Times, Bloomberg

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